Eye on PNGRB action; take informed call on gas: IIFL

Harshavardhan Dole of IIFL said that there may or may not be further headroom for the stock depending on PNGRB’s next plan of action. He said that if PNGRB does not file an appeal with the Supreme Court, there could be a definite upside for IGL.

Harshavardhan Dole of IIFL said that there may or may not be further headroom for the stock depending on PNGRB’s next plan of action. He said that if PNGRB does not file an appeal with the Supreme Court, there could be a definite upside for IGL.

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The Delhi High Court on Friday ruled in favour of Indraprastha Gas Limited ( IGL ) saying in its verdict that the Petroleum and Natural Gas Regulatory Board (PNGRB) does not have the right to fix gas prices. Ever since, the IGL stock has seen an upside.

In an interview with CNBC-TV18, Harshavardhan Dole of IIFL said that there may or may not be further headroom for the stock depending on PNGRB's next plan of action. He said, if PNGRB does not file an appeal with the Supreme Court, there could be a definite upside for IGL. However, he believes that PNGRB will most probably challenge this order in the apex court.

Dole also feels that this verdict was specifically with regards to IGL's case and is likely to benefit city gas distribution (CGD) companies only. It will hardly have any impact on gas transporters like GSPL and GAIL , believes Dole.

Instead of speculating on the prospects of stocks like GSPL, GAIL or others in the sector, Dole believes that the best policy is to wait and watch before investing in the gas sector. He explains that it is necessary to take an educated call on the gas stocks.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: How much more upside are you seeing in IGL? We have seen some kind of a recovery in the stock today, is there more headroom?

A: Yes and no. If the Petroleum and Natural Gas Regulatory Board (PNGRB) does not go ahead and file the appeal on this particular order in the Supreme Court (SC) then there is definitely a huge upside for IGL. Before the tariff rates were slashed and this uncertainty hit IGL, it was clearly trading something like 17-18 times one year forward.

Now the valuations are at a substantial discount to its earlier valuations. The valuations are 12-13 times, assuming that pre-tariff cut earning continues. If PNGRB doesn't go ahead and appeal in the SC, certainly there is a huge upside left in IGL. But as far as my understanding goes, in all probability PNGRB will go ahead and challenge this order in the SC.

Q: Did you feel the interpretation of the order was right, have you managed to go through the entire verdict? Do you feel it is only the city gas distribution (CGD) players which benefit and pure transporters are still under the purview of PNGRB?

A: As far as my understanding goes, this case was specifically with regards to IGL. There was some hunch over the regulator, the way in which they have fixed the tariff and they had a view that since they are transporting the gas and selling to the end level consumers, PNGRB does not have the right to determine any part of the network tariff.

When I say any part, essentially the hunch was in neither the network tariff nor the compression charges. They had not put a plea against PNGRB with regards to the industry and this was a specific issue with regards to CGD. As far as the pipeline for a company such as GSPL and GAIL go, I think things remain unchanged for them because this order is specifically for CGD companies as per my interpretation.

Q: How would you play GSPL and GAIL at this point in time?

A: Both GSPL and GAIL are trading at reasonable valuations. GSPL specifically, assuming that the tariffs are not cut substantially, it is offering a yield of 13-14%. The stock is trading at 6-7 times one year forward and that is inexpensive valuation. But leave aside the tariff overhang for these transportation companies, what is most important is where is the volume growth going to come from because outlook on incremental gas availability is just diminishing.

It looks like incremental gas will be available earliest by 2014-2015. If that were the case, assuming that regulator does not be harsh with them, their tariff remains unchanged. Specifically for GSPL, we are looking at a flattish earnings kind of scenario. Even though the stock would trade near book value, offers earnings yield of 13-14%, there is every reason for it to remain inexpensive till the time you see visibility on volume growth coming through.

I think the best way to play the whole theme is to wait and watch. Let the uncertainty over the sector recede and let us take an educated call rather than speculating as to how things will unfold. I think Petronet offers a great risk reward from hereon for a simple reason, it was never regulated by the PNGRB act. If it is dealing with imported gas logically, it should remain out of the purview of PNGRB as well as the government regulations.

Q: Petronet is down about 6% today, while my interpretation is that for Petronet it is still a positive because the Delhi High Court (HC) order clearly says that PNGRB doesn't have the right to fix the end price of gas. Do you think that is the right way to look at it, any reason why the stock should be down 6% today?

A: No, I think one has to interpret the HC order in spirit and only then take an educated call. What is happening right now is that there is a fear in the minds of investors that there maybe a possibility of an adverse regulatory intervention. That fear needs to come up before they start investing into the sector, in companies like Petronet.

I think if companies like Petronet consistently, over a period of time, deliver the earnings that the market is expecting, this concern will go away. This stock will start trading closer to the fair value.